Update Regarding CARES Act PPP Loan Program – Safe Harbor for Loans under $2 Million

By Alberto Montequin
May 15, 2020
Building and covid-19 effect design

On May 13, 2020 the U.S. Small Business Administration (“SBA”) published new guidance clarifying prior guidance which had left many loan recipients confused and fearful of potential penalties associated with their PPP loans. To recap, over the last few weeks there has been much news and discussion debating whether companies who have received PPP Loans were actually eligible at the time they applied for the loan, and whether they should return the money. This came on the heels of the SBA’s publication of Question 31 on its Payment Protection Program Frequently Asked Questions document (the “FAQ”) on April 23, 2020, which states that recipients should have considered their economic need for the loan, including their current business activity and adequate sources of liquidity, at the time they applied for the loan. FAQ 31 goes on to permit recipients to pay back their PPP loans without any penalty for making bad-faith certifications on their application, before May 7th (a deadline that was subsequently extended to May 14th). Ultimately, FAQ 31, as well as the subsequent interim final rules issued by the SBA, simply added to the confusion surrounding the PPP Loan program, and led many borrowers to pay back their PPP loan out of concern that they might be investigated by the SBA for inadvertently making bad-faith certifications on their loan application.

The newly published Question 46 of the FAQ clarifies that any Borrowers of PPP loans under $2 million will be subject to a “safe harbor,” meaning that they are automatically deemed to have made the certifications regarding their need for the PPP loan in good faith, and will not be subject to investigation or penalty. This guidance provides relief to the vast majority of Borrowers, as only a relatively small number of Borrowers have received loans in excess of $2 million, per the SBA’s published data. For those Borrowers who did receive loans in amounts greater than $2 million, Question 47 of the FAQ extends the deadline to pay back the PPP loan through May 18, 2020, so they have a few more days to consider whether they should pay back their PPP loan. In doing so, the following are a few factors these Borrowers should consider:

1) any sources of liquidity, including lines of credit of cash reserves, that the Borrower and/or its affiliates may have had access to at the time they applied for the PPP Loan,
2) whether tapping into those other sources of liquidity to cover the business’s payroll costs, rather than taking the loan, would have been significantly detrimental to the business;
3) whether those sources of liquidity are needed to cover expenses other than payroll costs or cannot be used for payroll costs for other reasons;
4) how the economic uncertainties made applying for the PPP loan a necessary action to secure the survival of your business; and
5) how the pandemic and the government mandated shut down orders have actually affected the underlying stability of your business.

Borrowers should document these details, as well as any other reasons they believe the PPP Loan was necessary to support its ongoing operations, in a brief memorandum in preparation for a review by the SBA and Department of Treasury, who have pledged to review every loan in excess of $2 million following the Borrower’s request for forgiveness. This review will likely look at the Borrower’s initial need for the loan, as well as the Borrower’s use of the loan proceeds, to ensure compliance with the terms of the CARES Act and the subsequent released guidance and regulations. In fact, it may be prudent for Borrowers with loans under $2 million to prepare a brief memorandum for their records, in case their lender asks them to reconfirm their certification that the current economic uncertainty made the loan request necessary to support the ongoing operations of their business.

FAQ 46 also states that if the SBA and Department of Treasury determine that a Borrower did not make the certifications regarding their need for the PPP Loan in good faith, and did not return the funds in a timely manner, it will “seek repayment of the outstanding PPP loan balance” and will deem the Borrower ineligible for forgiveness, but will not pursue any other penalties in connection with the bad-faith certification as long as the Borrower pays back the PPP Loan. Ultimately, Borrowers of PPP Loans in excess of $2 million can still have a legitimate basis for their application, but will need to make sure they are prepared to defend that basis when the SBA and Department of Treasury review their loan.

The periodically updated FAQ can be found on the SBA website at https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.

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